Insurance complaints soar as times get tough

Ombudsman Karen Stevens has had 2000 complaints inquiries in the last year. Photo / Supplied

Complaints against insurance companies are surging as the economic climate prompts consumers to take out more income protection insurance - mistakenly thinking they've bought redundancy cover.

Complaints have soared 20 per cent this year, which the Insurance Ombudsman says reflects tight financial times.

During recessions, says Grant Hill, head of products for Tower Health and Life, more people take out income and mortgage protection insurance when they feel their jobs are at risk - but "there's no perfect insurance solution to protect them from that". It only covers a percentage of lost income if they suffer an accident or illness.

Even mortgage protection insurance, which sometimes has a redundancy cover component, will only pay the mortgage for six months if the insured is made redundant. The amount paid under the policy will also be offset against any redundancy benefit. And redundancy insurance payouts are not made if the consumer anticipated being made redundant.

Ombudsman Karen Stevens has had 2000 complaints inquiries in the last year, and 242 new complaints for full investigation. She says people finding it hard to make ends meet pursue claims more diligently, while insurance companies push back harder.

Stevens says consumers are inclined to rely on what they're told rather than what they read. Unfortunately in a lot of cases people either don't get the cover they need or don't understand the cover they've got.

"Consumers just don't know enough," says Stevens, "and people selling insurance don't know enough about the products. There's a lot of mismatching with insurance and consumers."

Many consumers don't know how much they will be paid if they have to make an income protection claim, and don't realise that if they get an ACC payment, it will be offset against their insurance.

A consumer with income protection insurance who opts to take lower levels of ACC cover may be caught out if their policy provides that it will offset either what the insured receives - or what they were entitled to receive - under ACC. This means even if the consumer deliberately reduces their ACC entitlement, the insurer can offset the full benefit they could have claimed.

Most income protection insurance problems stem from its disclosure provisions. Stevens says non-disclosure complaints form a quarter of her work. People don't tell their insurance provider information they needed to properly underwrite the policy.

Insurers can then choose to void the policy - so not only will the person not have a claim paid, they will not have a policy in the future.

Choosing the best adviser
Insurance Obudsman Karen Stevens says until financial adviser regulation comes into force, "you could be selling icecreams today and insurance tomorrow without any further qualification or experience".

Stevens says there are a few things consumers should look for when choosing an insurance adviser.

Find an adviser who is a member of an industry group with disciplinary procedures, such as the Institute of Financial Advisers, Life Brokers Association, Professional Advisors Association or Insurance Brokers Association of New Zealand.

Ask the adviser what education and experience they have, and how they are paid.

An adviser should carry out a needs analysis to help the consumer understand which products will best meet their needs. That information should be documented.